Today I reread a piece from earlier this year by Caitlin Long explaining the sweeping Bitcoin-friendly legislation enacted over the last couple of years in Wyoming, USA. Together the 13 new laws provide a comprehensive, accommodative legal and tax regime for both individuals and companies involved in cryptocurrencies. These laws were put forth to foster innovation, business development, and capital inflow to Wyoming.
Capital ultimately flows to where it’s treated best. For digital assets within the US, I’m pretty confident that will end up being Wyoming. It’s all about its legal regime respecting DIRECT ownership of digital assets, whether by individuals or institutional investors.
From a tax perspective, WY is about the lowest tax state in the US. There’s no personal income taxes, no corporate income tax, and no other cumbersome business taxes at the state level. Individuals can move to WY, set up an LLC, corporation, trust, foundation or other business in WY, or physically locate your cold storage in WY to take advantage of state laws. Businesses can apply WY law to contracts involving digital assets, legally domicile in WY, or physically locate in WY to take advantage of its laws. Bitcoin businesses that redomicile in WY would likely save a bundle, and there’s no sales tax on digital assets. Plus, there are 25 ‘opportunity zones’ in WY that provide potential capital gains tax deferral.
And then there’s custody. First off, WY has carved out a legal vehicle called a special-purpose depository institution that gets the benefits of a bank license, but is exempt from restrictive banking regulation. This legal structure provides a superior regulatory environment for custodians of digital assets. Furthermore, under WY law, digital assets custodied with a qualified custodian are still directly owned by the investor. This is completely opposite of traditional custody arrangements in which stocks, bonds, etc are held indirectly by investors—securities bought by an investor are technically the legal assets of the custodian that actually holds the securities, and investors only ‘own’ a claim on the asset held by the custodian. On top of all this, rehypothecation—a practice abused by traditional securities custodians creating systemic solvency risks to the global financial system—of digital assets is a felony in WY. All this amounts to a huge incentives for institutions to use custodians domiciled in WY, and for honest, solvent custodians to migrate to WY (and also perhaps may signal that custodians not based in WY are suspect).
So, as you can see, Wyoming is treating cryptocurrencies and digital assets as distinct from legacy securities and creating a legal and regulatory environment that acknowledges and honors the differences. In accordance with Wyoming’s stated purpose, this is simply good for business and will attract a lot of capital to the state.
I think this is a particularly big deal because Wyomings efforts are a major opening salvo in the race for jurisdictions to begin competing for capital based on regulatory arbitrage and services rendered to its constituents, a la The Sovereign Individual ( a prescient book that foresaw the invention of cryptocurrency and a favorite among Bitcoiners). A major theme in that book is that the information age has enabled the global entrepreneur—one that can domicile businesses and capital anywhere with little friction (and can also easily move to other, friendlier jurisdictions). Naturally, entrepreneurs will choose to do business in the best legal and commercial environment. This increases competition among jurisdictions to provide legal, tax, and commercial regimes that facilitate entrepreneurship and attract capital (and the prosperity that comes with it)—regimes that treat constituents more like customers and less like subjects. Sounds nice, doesn’t it?
I can only hope this work by Wyoming creates a wave of other (nation) states adopting similar regulatory frameworks. Game theory suggests this will happen. Wyoming has already defected. As capital flows where it is treated best, other jurisdictions will follow suit. Or so I hope. I’ll be watching closely.